Essay On Fringe Benefits Tax And Assessable Income In Australia.

Question 1

Alan is an employee at ABC Pty Ltd (ABC). He has negotiated the following remuneration package with ABC: • salary of $300,000; • Payment of Alan's mobie phone NI ($220 per month, including GST). Nan is under a two-year contract whereby he is required to pay a fixed sum each month for unlimited usage of his phone. Alan uses the phone for work-related purposes only; • Payment of Alan's thildren's school fees ($20,003 per year). The school fees are GST free. 
ABC also provided Alan with the latest mobile phone handset, which cost $2,000 (including GST). 
At the end of the year ABC hosted a dinner at a local Thai restaurant for all 20 employees and their partners. The total cost of the dinner was $6,600 including GST. 
(a) Advise ABC of its FBT consequences arising out of the above information, induding calculation of any FBT liability, for the year ending 31 March 2017. Assume that ABC would be entitled to input tax credits in relate:In to any G5T-inclusive acquisitions. (b) How would your answer to (a) differ if ABC only had 5 employees? (c) How would your answer to (a) differ if dents of ABC also attended the end-of-year dinner? 
Question 2

Two years ago Peta purchased a house in Kew. This house had two old tennis courts down the back which were in poor condition. She purchased the property for two reasons: 
so that she and her family could live in the house; and so that she could build three units on the tennis courts and sell them at a profit. 
In the current tax year the tennis club next door offered to buy the old tennis courts, but only if Peta first restored them to good condition. Peta decided to accept the dub's offer instead of going ahead with her plan to build and sell units. 
Peta spent $100,000 on preparing the tennis courts for sale. This involved a great deal of work. Peta had to resurface the tennis courts and build new fences around them. She then sold the tennis courts in the current tax year to the tennis club for $600,000. 

Salaries and wages

Answer to Question 1a:

In order to ascertain the “Fringe Benefits Tax (FBT) liability” of ABC Private Limited from the perspective of Alan, it is crucial to undertake the below-stated assumptions:

Salaries and wages:

FBT does not take into account the salaries and wages that are paid to the staffs working in an organisation (Barkoczy 2016). Therefore, for calculating the FBT liability, the salary of Alan needs to be excluded.

Bill from usage of mobile phone:

The employers are often involved in paying the bills for mobile phones that are used on the part of the staffs working in the organisations. From the case study, Alan was not provided any amount on the part of his organisation for paying his mobile expenses. However, the organisation has paid directly the mobile expenses to the mobile service provider. It has been evaluated that the monthly mobile expense is smaller than $500; however, the monthly expense in the year has amounted to $2,640. Hence, it could be adjudged as FBT in the context of ABC Private Limited.

School fees of the children:

The school fees of Alan’s children have been incurred on the part of ABC Private Limited, which indicates that the organisation has paid the personal expenses of its staff. Hence, it needs to taken into account under FBT (Bird and Zolt 2014).

Computation of taxable FBT amount:

The organisation has provided a mobile phone to Alan, which is to be used for office purpose. According to the viewpoint of the employer, such expense is to be classified in the form of expense, which occurs from work purpose. Hence, the buying price of the phone is to be included for calculating the overall amount of GST inclusive items. After such computation, the exclusion of gross amount is necessary for calculating the FBT amount, which is taxable (Davis et al. 2015).

Entertainment programs:

The employers often spent money on entertaining their staffs in the form of special programs, which could be considered as fringe benefits arising from entertainment (Eccleston and Warren 2015). Such claim is justified only, if the amount spent is incurred for the staffs only. However, as argued by Gupta and Sawyer (2014), the expenditures spent to entertain the staff or family members could not be considered as the entertainment fringe benefits. In addition, as the individual amount incurred to entertain the staffs is extremely difficult to calculate; therefore, FBT computation could not be included on the part of ABC Private Limited.

Bill from usage of mobile phone

Added benefits of GST:

The overall amount associated with the extra benefits of GST and GST free benefits is to be calculated individually. After this, the amounts are depicted by multiplying the gross rates, which could be applied to different types of benefits (Lang 2014).

Adjustment of taxable amount:

After adjusting the overall taxable amount, it is adjusted with the FBT rate of 49% for calculating the FBT liability associated with the employer (Ato.gov.au 2017). 

According to the above-stated assumptions and regulations, the FBT liability related to ABC Private Limited is depicted as follows:

Based on the provided case, the cost per staff for dinner of ABC Private Limited would increase largely. Due to this, it would result in increased FBT liability. In accordance with the provided case, the computation of FBT liability is depicted as follows:

On the contrary, with no change in the overall cost per staff, the cost of dinner is reduced in accordance. Due to this, the liability of FBT would not change and the answer would stay same as $22,339.35.

From the above discussion, the application of FBT is possible for the staff-related benefits. If the concerned organisation takes into account the clients, FBT would constitute of the amount incurred on the staffs. Thus, it is not possible for ABC Private Limited to claim any subtraction for the entertainment of the clients.

For the residents of Australia, the income obtained from direct as well as indirect sources within or outside the borders of the nation is deemed as assessable income. According to Saad (2014), the sale of asset has generated an income, which needs consideration as assessable income in the context of the Australian residents.

In accordance with ITAA 1997, both statutory income and ordinary income fall under the category of assessable income. The ordinary income is the sum of money obtained with the help of any ordinary or general path of action. “Section 6(5) of the Act” states that ordinary income could be classified as follows:

• Income made from personal exertion in the form of leave encashment along with salaries and wages
• Income made from property in the form of rent, dividend made from investment in shares and interest made with the help of deposits
• Income made with the help of business transactions in the form of net gain, farming income and share sale

On the other hand, the incomes that could not be generated through any normal action course are adjudged as statutory incomes. In accordance with “Section 10(5) of the Act”, these types of incomes are enumerated as follows:

• Capital gains by carrying out sale associated with the capital properties
• Large amount received after the termination of employment or finish of service of contract
• Bonus related to insurance
• Bad debt recovery
• Income obtained from exchanges of trade
• Royalty
• Realisation of trade

The computation of statutory incomes is made separately to determine the taxable amount from the generation of incomes. The case study reveals that Peta has purchased a home two years ago and it contains two tennis courts. Peta has intended to stay in the home permanently for obtaining income by selling the two tennis courts in terms of units. However, with the passage of time, the tennis club has been sold for $600,000.

School fees of the children

The income made through sale of the tennis courts could be categorised as assessable income. The reason behind this is that Peta has purchased the asset for making profits by selling the tennis courts. Moreover, it has been found out that Peta has spent $100,000 for resurfacing and building fences to build the tennis courts. Hence, in accordance with “Section 6(5) of the Act”, this income of Peta could be adjudged as assessable income (Saad 2014).

On the contrary, it is to be noted that no dealings of real estate have been conducted on the part of Peta, despite the intention of making profit through sale of the tennis courts. Moreover, the woman has intended of selling the overall property in parts. However, she was forced to carry out the overall sale due to some obligations. Hence, the amount obtained through sale of the property is to be classified as statutory income (Taylor and Richardson 2013).

Along with this, Peta needs to make tax payments on the net gains, if she represents the same in the form of ordinary income. The taxable sum of money could be calculated by deducting the overall buying price of the asset and other expenses from the net gains. Thus, if the amount is represented as capital gain, Peta could obtain an exemption of 50% on the net gains (Ato.gov.au 2017).

Hence, after evaluation of the above discussion and perspectives, the sum of money, which is $600,000, could not be recognised as ordinary income in accordance with “Section 6(5)”.

References:

Ato.gov.au. (2017). What to include in your assessable income | Australian Taxation Office. [online] Available at: https://www.ato.gov.au/Business/Income-and-deductions-for-business/Working-out-your-assessable-income/What-to-include-in-your-assessable-income/ [Accessed 21 May. 2017].

Ato.gov.au. (2017). Fringe benefits tax (FBT) | Australian Taxation Office. [online] Available at: https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/ [Accessed 21 May. 2017].

Barkoczy, S., 2016. Foundations of Taxation Law 2016. OUP Catalogue.

Bird, R.M. and Zolt, E.M., 2014. Redistribution via taxation: the limited role of the personal income tax in developing countries. Annals of Economics and Finance, 15(2), pp.625-683.

Davis, A.K., Guenther, D.A., Krull, L.K. and Williams, B.M., 2015. Do socially responsible firms pay more taxes?. The Accounting Review, 91(1), pp.47-68.

Eccleston, R. and Warren, N., 2015. The devil is in the detail: the distributional consequences of personal income tax sharing in the Australian federation.

Gupta, R. and Sawyer, A.J., 2014. The costs of compliance and associated benefits for small and medium enterprises in New Zealand: Some recent findings.

Lang, M., 2014. Introduction to the law of double taxation conventions. Linde Verlag GmbH.

Saad, N., 2014. Tax knowledge, tax complexity and tax compliance: Taxpayers’ view. Procedia-Social and Behavioral Sciences, 109, pp.1069-1075.

Taylor, G. and Richardson, G., 2013. The determinants of thinly capitalized tax avoidance structures: Evidence from Australian firms. Journal of International Accounting, Auditing and Taxation, 22(1), pp.12-25.